Inflation expectations in the U.S. are rising, which supports the currency

The U.S. dollar edged higher Friday as recent increases in inflation expectations helped support the currency.

The Wall Street Journal Dollar Index, which measures the currency against a basket of 16 others, rose for the fifth time in the past six sessions, gaining less than 0.1% to 83.62. The currency rose 0.6% for the week and has climbed 1.1% from its low for the year reached Feb. 15.

Economic data released this month showed an acceleration in pricing pressure early in the year for both consumers and businesses. The U.S. economy has “the highest inflation risks” of any Group of 10 nation, according to a note published Friday by Bank of America analysts. Market-based measures of 10-year inflation expectations in the bond market have climbed above 2%.

In the 12 months through January, overall consumer prices rose 2.1%, beating economists’ expectations of a 1.9% rise. The producer-price index, which measures prices businesses charge for their goods and services, was up 2.7% from a year earlier. Wages rose 2.9% for the month, which was faster than expected.

Federal Reserve officials upgraded their assessments on the economy and inflation at their January meeting, though they didn’t give a clear indication that they are close to accelerating their projections for the pace of interest-rate increases this year. Faster inflation often leads central banks to raise interest-rates, which typically help attract investors to a currency through greater rates of return.

Photo:
Mark Lennihan/Associated Press

“We’ve bounced back pretty nicely from the lows,” said
Mazen Issa,
a currency strategist at TD Securities. “I don’t think we’re at a point where we should be leaning lower on the dollar.”